Research Notes

Leverett, MA is handcuffing its citizens for the next 20 years

Some are intrigued by the fiber to the home (FTTH) case in Leverett, MA, LeverettNet. It’s an an interesting case worthy of discussion. Here are the facts:

A. It is a municipal project, and this means that the municipality is moving into a commercial market where private operators operate and compete.

B. Property taxes are used to finance part of the project, and the citizens of Leverett are forced to pay for the project for the next 20 years, regardless of whether they use the infrastructure.

C. The city of Leverett will probably over time create a telecommunications monopoly where no competitor will dare to enter in future.

D. The city of Leverett has created a path dependent technological strategy that they will not be able to adjust should conditions change in future, e.g. should the prices of other networks fall or should residents find alternative networks more suitable.

There is no doubt that a private telecom provider would love to get the conditions guaranteed to Leverett’s Municipal Light Plant (MPL). Private providers would like to be able to charge households for access to their infrastructure, even if they didn’t use it. Private providers would have no problem to offer a compulsory contract with a set rate for 20 years. The model chosen in Leverett is tailored to a monopoly and will eliminate any form of competition in the long term – AT&T, Comcast and Verizon would love the model from Leverett, if they could get it.

Facts about the case in Leverett
Here are the facts laid out in the case study made by Susan Crawford and in this Q&A from the Leverett municipality.

1. The town of Leverett has created a bond for $3.6 million to be paid back in 20 years at 4% interest.

2. There are 630 households in the city. This means that the loan per household equals $5714 per household.

3. Each property is assessed an extra property tax increase of $25/month. This must be paid by every property owner for 20 years regardless of whether they regardless of whether he/she uses municipal fiber or not. That’s $300 per year in paying back the principle on the loan. For perspective, this is equivalent to a nearly 5% property tax increase for property owners in Leverett.

4. As for paying for broadband service, one option is to charge a flat rate of $61.30/month (which would include the projected fees for internet and phone service, taxes, access, operation and maintenance), a rate that’s locked in for 20 years. It is not ideal from a consumer perspective to have a set rate for 20 years. If the past is any indication, prices for substitute technologies will fall. However the city may move for tiered rates to exploit some residents who are willing to pay more and to recover costs more quickly.

5. The interest fee is only assessed on those households that subscribe to the service. That being said, the subscription fee is based on service and interest.

6. If many households subscribe, the payoff time is quicker and the total amount paid in interest will be lower. However if few subscribe, the payoff is delayed and the total interests fees grow. That being said, it if doesn’t work out, the finances grow worse and worse.

7. In practice then, the price of broadband is set at $86.30 without getting a TV product in the package.Let’s look at the numbers in relation to a city of 20,000 households. Using Leverett’s model and assuming a similar population density, a city would borrow $115 million. For many municipalities, this would mean indebting themselves even further than they are today. Assuming a median house price of $200,000, the property tax burden would need to increase by $300/household annually or $6 million. This would be equivalent to an 11% increase in property taxes, assuming the average property tax rate of is 1.3% of the property value.

The social consequences
It’s important to consider what it means when a municipality moves into the privatized market and takes on the responsibility normally managed by private telecom operators

1. Networks capable of providing 100 Mbps speeds already reach 85 percent of U.S. homes with wired networks, and 95% of Americans have access to 4G/LTE mobile networks. American carriers invest some $75 billion in broadband infrastructure, nearly a quarter of the world’s total capex. Put simply, there is plenty of infrastructure in the US, and telecommunications companies invest each year.

2. If the municipality decides to become a telecom provider and give itself advantages that private providers can’t get, then telecommunications companies will reduce their investment in that location and look for other areas. In practice, citizens’ options will be reduced over time, and they will be more or less dependent on a municipal monopoly.

3. In situations where a commercial telecom operator meets competition from a municipal broadband provider is effectively a change in the the rules of the game. It’s not fair competition. In many case it may create perverse incentives for the incumbents to milk its infrastructure and reduce investment. They will compete on price rather than better technology which requires investment. If the incumbent lowers prices, the conditions for the municipality may change for the worse.

4. If the municipality does not have the number of subscribers as expected, then the municipal broadband provider will run a deficit that will borne by the taxpayers. This will mean more taxes or less welfare.

Municipal broadband exposes citizens to increasing risk and taxes. At the same point, it’s impressive that the citizens of Leverett are able to predict the technology of the future (better than many futurists and analysts, apparently), and they are so convinced that they can move forward with a fixed price for the next 20 years.

FTTH and Economic Growth
The academic evidence between FTTH and economic growth is neither clear nor conclusive. Rather than consider FTTH as a magic bullet to save ailing communities, broadband should be evaluated as one variable in a complex equation for economic growth.

There are studies on broadband deployment and employment in developed countries, but the results are modest, for example less than a 2% increase in employment in certain communities as a result of an increase in broadband speed and penetration. Some studies demonstrate that employment goes mainly to government workers. Furthermore, the results tend to be better in communities that already have well-educated citizens.

Consider countries such as Japan and South Korea with the highest FTTH penetrations. In Japan, many have cancelled their fiber subscriptions in lieu of 4G/LTE mobile broadband. In South Korea, the government complains of jobless growth. Residents spend much of their time on high definition immersive video games, but broadband-based exports of digital goods and services are lacking. Most tellingly, Japan and Korea still make the majority of their GDP from traditional, pre-broadband industries. The U.S. on the other hand has transformed its economy into new broadband-based industries and digital goods and services are its third largest export.

Consider Southern Denmark where a significant private investment was made in FTTH. It’s interesting to look at the economic growth in the country as a result. Southern Energy of Denmark, a private utility cooperative, invested some $638 million in the rural part of the province of Jutland, but it’s difficult to find the measurable effect. The area accounts for about 10% of Danish households, but economic growth is still centered in metropolitan Copenhagen, in another province all together, where there is no FTTH at all.

Most interestingly for Denmark, a country that perennially scores high on the OECD’s study of broadband deployment, speed, adoption, and price that while 70% of the population have access to ultra-fast broadband, less than 2% subscribe. At least for Denmark, all telecom investment comes from private sources, and taxpayers are not on the hook for broadband projects that don’t work out.

Israel, one of the most innovative countries in the world, is another classic example as a country that has fared well even in the face of the economic crisis, but where FTTH penetration is less than 1%.

Perhaps what is most discouraging for small, rural communities such as Leverett is that they put their hopes into FTTH as the silver bullet to their economic woes and forego other public projects where they might get more bang for the buck: education, retraining, health etc.

We accept that there can be challenges for infrastructure in some communities, but the challenges won’t be solved by increasing property taxes and establishing an inherently flawed model in which the municipality competes with private companies. There are more intelligent ways to get private players to invest using a carrot & sticks approach. For more information, contact Strand Consult.

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